Banks jittery over SC verdict on coal blocks, may see surge in bad loans

MUMBAI: The Supreme Court's ruling on Monday that declared the allocation of more than 200 coal blocks illegal has made the banking sector nervous about the final outcome, given that any likely cancellations will hurt borrowers' ability to repay loans and steeply increase bad debt burden for the banks.

Power developers have invested Rs 2.87 lakh crore toward exploration, mining and attached enduse projects, which represents almost 3% of GDP, backed by large loans from banks. To be sure, it's not clear what the court will decide and some experts say it's likely to maintain allocations that have been developed, perhaps with the imposition of a penalty. The Indian banking sector has a total exposure of more than Rs 5 lakh crore towards the power sector, which is under pressure owing to a host of problems such as lack of fuel, delays in land acquisition and clearances, and the poor financial health of distribution companies.

"In finance and money, you cannot have retrospective orders being passed but unfortunately it has happened," said Diwakar Gupta, former State Bank of India managing director. "The same thing happened when 122 telecom licences were cancelled.

You can consider imposing a fine but you cannot have a retrospective order where there are other parties involved," said Gupta, referring to the cancellation of telecom licences due to wrongdoing in the allotment of spectrum.

The Supreme Court will decide on the fate of the mines when it resumes hearings in the case on September 1. Banks are labouring under a bad-debt burden amid a sluggish economy that's only recently started showing signs of a recovery.

"There could be a potential threat to the banking system as some part of these exposure could turn into bad debt," said MV Tanksale, chief executive officer of the Indian Banks Association lobby group.

The exposure of Rs 5 lakh crore amounted to 8.8% of total nonfood credit at the end of June, up from 4.3% in March 2008. "Possible cancellation of allotted coal blocks to these project may adversely impact the chances of recovery of these loans," said Asutosh Kumar Mishra, analyst with Karvy Stock Broking.

"If these projects fail to take off, banks will have to either write off or classify them as nonperforming assets. Even if the court asks the government to reallocate these coal blocks, it would mean substantial delays and would result in slippages and restructuring of loans."

Of the allotments deemed illegal, 40 captive coal blocks are currently under production and another 10-12 have signed mining leases with state governments.

The target production from these mines was 50 million tons for 2014-15. In case the Supreme Court decides to de-allocate the mines, companies such Jindal Steel and Power and Hindalco among others will have to look at alternative sources of coal that may be expensive and erode profitability.

"We expect part of this exposure to turn into NPAs over the next 18 months as many of these projects will become unviable," Mishra said. "We maintain our cautious view on the sector, specially on the public sector banks, which has relatively higher exposure to the sector."

AUBS report said any cancellation would impact JSPL and other companies.

"Replacing captive production with coal purchased at market prices could impact JSPL. The impact on Reliance Power's valuation could be 40% as excess coal usage from Sasan is at risk. The others to get negatively impacted are Tata Power, Bhel and Adani Power," said the report.

In case the Supreme Court rules in favour of cancellation, the blocks may be put up for auction. It is possible that companies manage to get the same blocks in the auction but in all likelihood it would be at a higher price, which reduces the economic benefit of these mines.

This could hurt cash flow and consequently the ability to repay loans, experts said. Even in a best-case scenario, where the company retains the mine, it may have to rework the repayment schedule with its lender.